Some Bad News Aside, Boeing Is Set to Flourish With Years of Backlog

Boeing (NYSE:BA) is a company that has recently been in the news for all the wrong reasons.  For starters, the company has missed earnings in the last two quarters, due mainly to some program charges on the military side of the business.  For much of the year, moreover, the latest Airbus 320neo has stolen the thunder (and orders surely) from Boeing’s latest 737MAX.  And it has gotten behind in its largest military program, the new KC-4A Tanker program. Moreover, second major defense program, the V-22 Osprey Tilt-rotor aircraft, is approaching the end of an illustrious run.  These things aside, Boeing is an enormous company with years and years backlog, one that has executed well in a touggh and consolidating industry. Consider the following analysis.

Low Orders Are Not Indicative Of Possible Peril:

As of the latest quarter, Boeing’s commercial business had a robust backlog of about $472 billion with close to 5,700 orders in the pipeline. The company can also count  on the $55 billion backlog at Defense, Space & Security. ^[1] This means that, at the current rate of production, the company can continue uninterrupted production for the next 7 years. So far in the year, Boeing has secured only 334 orders. ^[2] But one must not fret as history has proven that airline orders are cyclical in nature.

What has happened is that with fuel prices so low, airlines can afford to wait on buying new planes. Unless the world spirals into recession, we can expect the orders to bounce back within the next five years. For instance, orders for the 787 Dreamliner has slowed for the third year in a row. That said, CEO Dennis Muilenberg has confirmed that delivery slots for the 787 in 2018 are fully assigned. Furthermore, for 2019 and 2020, delivery slots are almost 75% full at the current production rate. With so many delivery slots open after 2020, airlines need not place orders immediately. This indicates that we can expect deliveries to pick up in the next few years as old planes will need retiring. Until then, the heavy backlog can help sustain operations. ^[3]

Additionally, let’s not forget that Airbus (Boeing’s main rival) is also pretty much in the same boat as Boeing. While Boeing orders are down 8.4% year over year, Airbus orders are down 8.6% year over year. ^[4]

The 737 Is A Clear Winner:

The 737 is seeing increasing demand with every quarter. Since the introduction of the 737 MAX, the model has bagged close to 3,200 firm orders. The aircraft is powered by the newly designed CFM International LEAP-1B high-bypass turbofan engines that are 20% more fuel efficient. Currently, the program has a strong backlog of 4,400 orders. The company has revealed that due to the high demand, the production for the aircraft will be heavily ramped up and the entry into service will be accelerated. ^[5]

Boeing is on track to increase production of the 737 from the current 42 per month to approximately 47 in 2017. Additionally, the company plans to push production to a further 52 per month in 2018 and then 57 per month in 2019. This esteemed airframe is generating significant demand, as per our calculations, even at the 2019 production rate, the program will continue to remain oversold.

Business At Defense, Space & Security Could See Increased Demand:

Boeing has seen good demand for all defense programs in the year so far. Not accounting for the one-time charge on the KC-40A tanker program, the company has performed solidly in the last quarter. As mentioned previously, the defense segment boasts of a $55 billion backlog, 37% of which is from international customers.

Domestically, the Obama administration’s budget request for FY 2017 highlights advances in key BDS programs. The company anticipates a period of modest growth in defense spending over the next five years. Additionally, most technical glitches on the KC-46A tanker have been mended. Unless Boeing runs into more problems into the fuel tanker program, we expect the company to move on to low-rate initial production (LRIP) despite the delays and recurring cost overruns (paid for by Boeing). ^[6]

In conclusion, we can say that Boeing is far from doomed as can be seen from its robust order backlog, and the heavy demand in the 737 program and Defense, Space and Security segment.

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1. Boeing’s Q2 Earnings Call Transcript, www.seekingalpha.com [↩]
2. Boeing: Commercial, boeing.com [↩]
3. Boeing’s Weak Dreamliner Orders Don’t The Whole Story, www.foxbusiness.com [↩]
4. Boeing And Airbus: The Order Battle In July 2016, www.seekingalpha.com [↩]
5. Q2 2016 Earnings Release, www.boeing.com [↩]
6. KC-46 Production Decision Expected Later This Month, www.defensenews.com [↩]